Rating the Bitcoin – When new technologies meet

Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency – the system works without a central repository or single administrator – and has been introduced in 2009. Unlike fiat money, Bitcoin is unique because it is de-centralized and, more importantly, not under the control of bankers or financial regulators. An argument often used by Bitcoin supporters calling the currency insulated to any kind of manipulation.

New Bitcoins are generated by a competitive and decentralized process called “mining”. This process involves that individuals are rewarded by the network for their services. Bitcoin miners process transactions and secure the network using specialized hardware and are collecting new bitcoins in exchange. Basically it is a high-tech exercise which means you need sufficient computational firepower.

Bitcoins, just like traditional currencies, are traded. Recently the value of Bitcoin has been increasing very rapidly and there is much excitement in the markets. There is also talk of a potential Bitcoin bubble. Recently, Bitcoin futures have been approved. Unlike futures exchanges for the regular markets, there are more than one settlement places for the Bitcoin futures. This brings some additional complexity to a crypto currency which is already complex itself.

Unlike fiat money, Bitcoin is unique because it is de-centralized and, more importantly, not under the control of bankers or financial regulators.

Given this (growing) complexity, and the emergence of new crypto-currencies, such as Ethereum, Ripple, Litecoin, or Monero, it is interesting to measure the complexity of the Bitcoin, as well as its rating. Obviously, we’re speaking of a Resistance to Shocks rating. Over the past few years, the price of Bitcoins has been increasing, notwithstanding de-stabilizing events such as the Ukraine crisis, the Brexit, the US elections, the Korean crisis, as well as scandals, tsunamis, or the fall of oil prices.

The price of the Bitcoin over the past 8 years is indicated in the plot below. It clearly shows a phenomenal acceleration over the past year.

The complexity of the dynamics of Bitcoin’s price (of Bitcoin, in other words) is shown in the next plot. Here we note something interesting: when complexity increases, the price goes down (this starts in 2013). When, complexity decreases, the price goes up again. This is clearly visible after 2015. At present, as Bitcoin is skyrocketing, its complexity is dipping.

The Resistance to Shocks Rating of Bitcoin is depicted in the last chart, below. The rating has a very high value most of the time, close to nearly 100%, which corresponds to a five-star rating. The minimum value of 80% – four-star rating – has been attained in 2016, however, it has risen rapidly to 90% and more. For the moment, things look pretty solid.

Given that, unlike corporations, currencies (and crypto currencies) react quickly, the RtS rating of Bitcoin is issued on a daily basis. The goal is to capture the dynamics of the rapidly changing economy. This is why the above plot is continuous.

The above analysis is unique. Bitcoin is a high-tech crypto currency. RtS ratings are provided by an equally high-tech rating robot. While conventional currencies can be manipulated, not to mention simply printed, Credit Rating Agencies are known for opaque rating practices not to mention conflict of interest. What this short article illustrates is how leading edge technologies can join forces in a context devoid of regulators, administrators, bankers and, most importantly, where manipulations take place on a daily basis.

Jacek Marczyk

Author of nine books on uncertainty and Complexity Management, Jacek has developed in 2003 the Quantitative Complexity Theory (QCT), a new complexity-based theory of risk and rating. In 2005 he founded Ontonix, a company delivering complexity-based early-warning solutions with particular emphasis on systemic aspects and turbulent economic regimes. Read more publications by Jacek

Published by Jacek Marczyk

Jacek Marczyk, author of nine books on uncertainty and complexity management, has developed in 2003 the Quantitative Complexity Theory (QCT), Quantitative Complexity Management (QCM) methodologies and a new complexity-based theory of risk and rating.
View all posts by Jacek Marczyk